2009 (11) TMI 918 - AT - Income Tax

TP Adjustment - Comparable selection - unadjusted arithmetic mean of the comparable companies worked out to 9.89%. The assessee's operating margin on total operating cost worked out to 15.97%, which was higher than the average of comparable companies - HELD THAT - We find ourselves in agreement with the ld. CIT(A) that the AO has rejected the profit margin declared by the assessee in an unjustified manner. He has selected four companies which were rejected by the assessee company. The assessee submitted that these companies were rejected for the selection because they either had insufficient description information, or significant related party transaction or had exceptional year of operation. The reasons were not considered by the AO and he rejected the submission in a summary manner. Assessee's contention that selection of these companies by the AO amounts to Cherry Picking and hence not justified caries considerable cogency. AO also did not elaborately analyse the results of these companies, but merely stated that at least 3 other companies rejected by the assessee in its document had shown better margin than the assessee company. Hence he made the adjustment of 5%. Now the assessee's submission in this regard is that the average mean of these four companies selected by the AO also was 13.62%. It was lower than the operating margin of the assessee which was 15.97%. This also shows that AO's action did not have any basis. Further, the ld. Counsel of the assessee's submission is that the AO has made an adjustment of 5% in the operating profit margin where-as the existing provision of Act contained in the proviso of section 92C allows a variation of 5%. Therefore, it is amply clear that the AO has arbitrarily made addition which is not in accordance with law. Hence, we do not find any infirmity or illegality in the order of the ld. CIT(A) in this regard. Hence, we hold the same. In the result, the revenue's appeal is dismissed.

Summary

Issues:
1. Deletion of addition on account of transfer pricing of international transactions.

Analysis:
The appeal pertains to the deletion of an addition of Rs. 30,96,320 made by the Assessing Officer (AO) on account of transfer pricing of international transactions of the company with associated enterprises for the assessment year 2003-04. The AO had asked the company to produce transfer pricing documentation justifying its arms length price. The company declared a net margin of 15.97% on service charges received from Toshiba Japan, comparing it with the average operating margin of 8 companies, which was 9.89%. The AO, however, rejected this comparison, selected four companies for comparison, and made an arbitrary adjustment of 5% to the operating margin, resulting in the addition.

Upon appeal, the Commissioner of Income Tax (Appeals) (CIT(A)) held that the AO had not utilized the full data provided by the company for comparison and made an arbitrary adjustment without providing reasons. The CIT(A) accepted the operating margins shown by the company and deleted the addition. The company then appealed against this order.

During the appeal before the Appellate Tribunal, the company's counsel argued that the company had undertaken a detailed analysis to determine the arms length price of transactions with associated enterprises. The company selected comparable uncontrolled transactions in accordance with the rules and chose TNMM as the appropriate method. The counsel contended that the AO had erred in cherry-picking companies for comparison and not providing valid grounds for disregarding the company's analysis. The Tribunal agreed with the CIT(A) that the AO's rejection of the company's profit margin was unjustified, and the selection of companies for comparison amounted to cherry-picking. The Tribunal found that the AO's arbitrary adjustment of 5% did not have a legal basis, as the existing provision allowed for a variation of up to 5% from the arithmetical mean of prices determined by the most appropriate method.

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s order to delete the addition made by the AO. The Tribunal found that the AO's arbitrary addition was not in accordance with the law, and therefore upheld the CIT(A)'s decision.